Medupi Power Project (Loan in Euro)

Overview

Description

The Medupi Power Project will result in the implementation of 4,764 MW coal-fired power plant, located at a mine-mouth, connected to the national grid. Attributed to AfDB funding are six super-critical boilers and six turbo-generators fully commissioned and operated to produce 4764 MW electricity at bus bar.

Moreover, the increased electricity production capacity will help Eskom improve its reserve margin. It will also maintain Eskom's capacity to export power to neighbouring countries.

Objectives

The objective of the Project is to increase the country's generation capacity and improve reserve margin in order to adequately, efficiently and reliably serve electricity demand in the country and in the Southern Africa Region.

Rationale

1.2.1 South Africa was forced to resort to load shedding in 2008. To mitigate shortages and to meet medium term demand, Eskom has prepared an Integrated Strategic Electricity Expansion Plan (ISEP) to support the economic objectives of the government's Medium Term Strategic Framework 2009-2014. It has reopened power plants which were previously decommissioned and is also building new power plants, namely Medupi thermal power plant (4764 MW), Kusile thermal power plant (4764 MW) and Ingula pump storage (1332 MW). Of the above, the Bank has been requested to fund the Medupi power project. 1.2.2 Determined by ISEP, Medupi has been studied at feasibility level utilising the locally available coal and the project detailed design prepared. The project will consist of 6 units of super critical boilers and the turbo generators. The efficiency of the power plant will be 40% compared to 34% of the sub-critical technology. The plant will be pulverised coal fired, directly dry cooled and Flue Gas Desulphurization (FGD) ready. The construction of the project commenced in May 2008. Supported by an international consulting firm, the construction of the power plant is being managed by Eskom. The unit 1 is expected to be commissioned in February 2012 and each of subsequent units will be commissioned at six month intervals. Increase in production capacity by 4764 MW will strengthen private sector competitiveness in the country. 1.2.3 Given the sheer volume of financial resources required (ZAR125.63 billion), it is quite challenging to fund Medupi project. In essence the project is being funded through a combination of measures

(i) increase in tariff

(ii) issue of bonds

(iii) GoRSA support

(iv) funding from the Multilateral Development Banks and

(v) the borrowing from the Export Credit Agencies. The Bank's support to fund Medupi power project is required to fill the financing gap. The Bank's comparative advantage lies in its ability to offer loans with a long tenor and an attractive interest rate compared to other sources. The Bank is cofinancing this project in partnership with the World Bank and the Export Credit Agencies. The Bank's funding conforms to the Paris Declaration; accordingly a co-financed project is the way the Bank wants to go to ensure successful project implementation. 1.2.4 The Bank's support is a follow up of the previous project, namely the corporate loan to Eskom which has been utilised to fund the CAPEX program of Eskom. The Bank's support for the present project is greatly appreciated by the government in view of the current global financial and economic context which makes it difficult to raise funds on the market. Therefore, the Government's request to fund Medupi power project deserves the support of the Bank. However, the Bank funding of this project does not crowd out the participation of the private sector since Eskom will need to raise financial resources to implement the CAPEX program estimated at ZAR 385 billion over the next five years.

Benefits

The project benefits to South Africa go far beyond new generation capacity. The project impacts on

(i) GDP

(ii) new industries

(iii) employment generation and poverty reduction

(iv) regional integration.

The electricity consumption is positively correlated to economic growth in South Africa. The additional 4764 MW capacity supports the long-term growth objectives of the GoRSA. The project will increase GDP growth rate by 0.34% due to estimated capital expenditure in the country's economy.

Medupi project will have substantial macro-economic foot print, providing support for new industries and creating jobs in the total value chain. The project's contribution to BEE is R9.8 billion, to BWO is ZAR3.6 billion, to SME is ZAR3.6 billion and to Local Content is ZAR23.2 billion. The project implementation will also see the growth of downstream support industry as summarized below:

i)Employment creation during the construction phase - The project will create a number of both temporary and permanent employment opportunities through the construction and implementation phases. Sourcing of construction workers from the local labour pool is likely to be limited to unskilled workers due to the highly technical nature of the work to be undertaken. At the peak of the construction phase the project will employ about 8 000 construction workers of which 60% will be sourced from Lephalale and surrounding areas. During operation the project will employ 1 000 unskilled workers.

ii)Local business opportunities - Project implementation will result in the growth of the downstream support industry in key sectors: "Some 2000 jobs will be created for the expansion of the coal mine to supply the project. "Project will result in the creation of boiler and turbine main components in South Africa. Up to 40% of the total spend (ZAR90 billion) will be spent locally. "Businesses to provide food, laundry, maintenance and security will be established to serve the workforce. "Hotels - About ZAR1 billion will be spent in the 100%-150% expansion of the local industry which will provide about 500 jobs. "Local Transport - Medupi will require services of 30-35 buses at peak operation which will result in the creation of 100 jobs. "Vehicle Maintenance - More than 500 vehicles are expected to be maintained locally creating employment for about 20 people.

iii)Local infrastructure development - A total of ZAR2 billion will be spent in providing housing. A total of 1 850 house are required, of which 320 will be purchased and 900 will be constructed. "The local sewerage plant will be upgraded at a cost of ZAR50 million. "ZAR50 million will be spent on building 2 schools, a recruitment centre, fire, social club, ICT centre and increased policing of the town.

iv)National infrastructure development- The Richards Bay to Lephalale road and Lephalale bypass will be constructed at a cost of ZAR1 billion, creating 500 jobs to enable the transportation of plant components to site. A freight forwarding facility will be set up at Richards Bay at a cost of ZAR90 million employing 150 workers.

The Eskom Development Foundation was set up by Eskom to deliver on its corporate social investment objectives to enhance the quality of life in targeted communities whilst maximising the strategic impact of Eskom. The Development Foundation provides grants for economic development as well as donations for social projects/programs and has developed support programmes, for the Lephalale community worth ZAR10 million.